The President, the Economy, and the Lag

I love the people who read this blog and send us e-mails. (Well, not all of them — but only because I don’t know all of them yet, I am sure.)

Consider Paul Kimelman. He lives in Alamo, Calif., and is C.T.O. of the Texas-based microcontroller company Luminary Micro. In the past, he has sent us e-mails that were better than our typical blog posts, so we put them up on the site as guest posts. The subjects have ranged from the Wii shortage to the correlation (or lack thereof) between school grades and career success.

Here’s his latest. There are echoes in it of an earlier post I wrote about how much the president really matters. If you are not the wonky-quant type, do not let the wonky-quantish first sentence deter you from reading on.

I was showing a friend how to set up a trend comparison of regression analysis vs. nonlinear regression for some work he is doing on consumer-confidence metrics and economic cycles (the reason for the comparison is to deal with the fact that confidence measures are not tracked linearly in time or in terms of actual metrics, and the apparent switch to cheaper imported goods during downward cycles creates non-linearities).

Anyway, this got me thinking about a question that I think is touched on a lot on the Freakonomics blog: namely, the question of how much a sitting president affects the economy (can take credit or blame for it), and how much lag there is.

The reason this got me thinking is that we normally assume a high lag factor in the economy, especially since it takes two quarters to measure a recession as well as the exit from recession.

But if we all believe that one of the major factors in G.D.P. growth or recession is consumer confidence (purchasing of goods and services fuels all levels of the economy, from manufacturing to transport to retail and so on), then one would have to assume that a new president could have a much more dramatic impact on the economy than we normally consider; I do not mean due to actions (not enough time), but rather expectation of actions to come.

The “morning in America” or “change” mantra of a candidate can inspire consumers to feel better about themselves and their own situations, and so [they] spend more. Oppositely, candidates running on negative platforms — “everything is a problem to be solved,” “it’s a dangerous world” — may have a depressing effect on the confidence of consumers.

Other related factors affect consumer confidence, often in quite strong ways. I do not mean the obvious things, but the indirect ones:

1) We know that many consumers react to the state of the stock market(s), even if they have no involvement in them. This is likely due to the assumption that stock markets are a direct metric for the health of the economy (and the average consumer keeping or losing his/her job).

2) Discomfort with the perceived state of the government likely has some impact. For example, the screwed-up election of 2000 certainly seemed to have a very negative impact on consumers and their confidence in the government, and so may have had a quick impact on spending.

3) It is currently unclear how much the 24/7 “news media” amplifies confidence trends. That is, the question is whether the hysterical need to state something catchy and be first about it has a stronger impact on the psyche of the average consumer than just the normal awareness of things.

For example, if people hear about plant closings in a particular industry, most will not fear for their own jobs. But if the talking heads ask menacingly “Is this the sign of a failing economy and the loss of many more jobs in all sectors?!” — do people start worrying and hold back on those purchases?

We know that sitting presidents have tried to overcome recessions or recessions-coming by telling America that all is O.K., by telling people to go out and spend money, as well as by throwing money at them (e.g. stimulus checks, tax breaks, etc.).

We can debate how well any of them have worked, but it seems, at best, we are looking at correlation of time (if you say “things are getting better” enough, [your statements] will align with the upward cycle, and so [your strategy] will appear to have worked). But the question is whether some presidents have been more inspiring by nature and so have gotten people spending when elected and kept people spending while in office. Reagan and Clinton in recent times certainly come to mind. Neither came across as “wonkish,” but more “insightful” and driven by an inner confidence. Ford, Carter, and George H.W. Bush never had that inner confidence. George W. Bush had it, but over time it was exposed as “false confidence” or “ignorance,” which is not the same (and not inspiring in my view).

I wonder what your readers think.


My confidence -- and my spending -- will increase in proportion to how much of the 30% loss of my retirement savings returns. As a war baby, not a boomer, I don't have much time to accumulate it again. Now I'm even wondering if my state bonds will pay up.


An interesting question, how presidents' styles affects people's behavior as workers / savers / consumers, during the business cycle. But, that's all subordinated to a much bigger question: is this just another periodic example of the business cycle? Or is it something much worse?

No quick fixes appear feasible, no matter how inspirational, optimistic or socialistic the new President's rhetoric.

Many, many participants have been partners in this crime. Negative savings rates due to equity extraction from barely-appreciated homes; new and unworthy borrowers whose monthly payments were set deceptively low, just long enough to make it attractive to roll the dice; bad actuarial assumptions and inadequate reserving practices for the default-insurance industry that sprang up to service the risky bad debt; and a lack of transparency in the whole daisy chain that's still opaque--there's just no quick way out of this tangled rat's nest, no matter who's smiling and encouraging us to buck up.


Where do we go from here?

bc, #33 above saying:

"Let the financial sector fail. Let the automotive sector fail. Let it all fail and infuse those who know how to turn a profit."

I wonder if you realize what the implications of that policy would be? Hoover's sec of the treasury, Andrew Mellon, I think, said "liquidate the banks, liquidate labor...etc". Are you a survivalist? Or what?

The social chaos and amount of human suffering would be inconceivable. Even if there was not total social collapse, you might have such a deep social dislocation that you would essentially replicate the Germany that gave birth to Hitler.

How are 'those who know how to turn a profit' supposed to turn that profit without anyone to buy their goods and services? And would you allow labor to fall to third world levels of existence with the resulting 'free market'? Are you prepared for massive slums along the lines of Calcutta or Rio?

This would be the logical outcome of the religion of the "free market" (and it IS a religion).

What you fail to realize is that people would DEMAND government intervention on a scale that would horrify you. This is why it is often said that Roosevelt 'saved' capitalism. By diverting these energies and preventing far worse.

Or perhaps you would prevent the people from bringing in a government that would satisfy those demands for the basics of life. Then you would have a military dictatorship and a banana republic.

Your Dad's dinner-table Republicanism has no answers that lead to a tolerable outcome for a civilized society in a situation like this.

The fact is that we have never been confronted with an economic environment quite like the one we are in now, all interconnected at the speed of light. NOBODY knows what to do, really. It's all guesswork.

The New Dealers were in the same spot and came up with some ideas that worked and others that didn't. Let's see what Obama does. So far I see no idication of any bold ideas or action.


DJ Crane

We are experiencing an example of the reality that value [like beauty] is in the mind of the beholder. But with value, we should inject the word "collective" in a couple places. "Collective value is in the collective minds of the beholders" Can we reasonably say that all of our economic activities and assets are somehow worth 30 to 40% less than they were worth last year? In a perceptual sense, that's true. And that illustrates that we don't live in a world of absolute or concrete value. So, when the collective society and economy decides to drive itself at 80 miles an hour, that's what we experience - dotcom, real-estate, etc. When collectively we say "this is not sustainable", we can chose to drive at 55. The thrill comes in the acceleration. The pain comes in the deceleration for many.

A President can set a tone - and perhaps even capitalize on a tone present in the collective public - to guide the economy from one speed to another. Jamming on the brakes or the peddle makes the ride jumpy. Smooth transitions seem preferrable. And whether we are cruising at 55, 80 or 30 it is possible for the economy to satisfy it's participants. What does not work is driving into the ditch or running into others.



If the current crisis has taught us anything about the economy it is this - the economy should be viewed as one large multivariate equation, not a series of small ones. Why is the govt likely to save GM? to save the estimated 2.5 million jobs that would be lost, of which "only" 300,000 actually work or GM. I know freakonomics is all about teasing correlations out of statistic but I think the global economy is just too tough a nut to crack.

To the point - we are a consumer driven economy so consumer confidence has a great deal to do with this and presidents can have some effect on comsumer confidence, but not in the long run. Eventually they need to deliver and consumers need to see results to continue to believe. And it will be hard to see results which such fundamental problems in the economy today - perhaps this explains why the stock market was lifted post the election but quickly settled back down to its recent lows - hard to ignore all that bad news even if we believe we have a better president on the way.



The journalism class cannot sum bars under a bar chart let alone compute a simple integral. The result of this ignorance is a two year presidential race devoid of economic reality as it pertains to the national debt and who created it.

Wealth distribution requires an understanding of the Gini-coefficient, so forget that.

We are an ignorant people getting more ignorant by the day and will suffer the same fate as other ignorant people. We will cease to exist because we are not smart enough to meet the competition.

It's over America. You had your chance and you blew it. Obama will continue to reward failures who will then multiply in greater abundance than they already are, and there is no future in that. Though Obama was a better vote than was the GOP who lie, steal, lie when caught, laugh in your face as they lie, and repeat the cycle until voted out of office.

It's over. The US has pressed the free-lunch theory and lost. Yes, lags are real and a nation cannot grow debt faster than product, indefinitely which is the legacy of Ronald Reagan, GHW Bush and GW Bush.

Now, sadly, it falls on the good guy, the first African-American president to take the fall because he doesn't understand the lags in the economy or the historical proportion of debt he just walked into. Obama with the help of Krugman and the economic textbook club of America think they can continue to accelerate debt at this point in history. We are so screwed blue it isn't funny.



Adam, they don't know what they're doing. The communication is pretty close to perfect. Perfect would be Paulson standing there saying, "...we really don't know what we're doing here, we're just making up as we go..."

No, you won't get that. You have to read between the lines.


Perception and reality are entirely different things, but can also fuel one another. A relatively small number of mortgages that go into foreclosure, drives the perception that all mortgages are risky, driving their related asset values far below their probable "real" value. The perception of risk on these securities is what is driving these unreasonably low values.

Presidents and their administrations sometimes can create real impact on an economy, such as the ability to manage interest rates, pump money into the markets, etc. But other times their abilities are constrained. One thing Presidents can do is manage perceptions and expectations, helping to drive confidence and behavior. FDRs fireside chats were great motivators of the American public. He was able get people stay calm, and to retain money in the banks at critical times. He also helped maintain funding at critical moments in the great world wars by selling bonds to the American public. Really he was just selling confidence that it was worth the investment--back foreign investment in US bonds were much lower than today, making it critical that the public provide the capital for these monumental events.

One of the great failures of the Bush administration is a lack of communication. He has never clearly explained the problems we face, or the actions the government are taking to correct the problem. Nor have they mobilized the public to maintain confidence. They are too willing to ask a great deal of the American taxpayer, without explaining why it is needed and how it will fix the problems we are facing.

There is just a request for $700B, without oversight, without explaining exactly why the money is needed, and how it will fix the problem. Then, one day they are bailing out the banks, the next day changing their strategy to buying troubled mortgage assets. It creates the perception that the administration really doesn't know what it is doing. This administration really needs to communicate regularly with the American public and bring them along on this journey. It will increase confidence that we are headed in the right direction. Without that, we are left with fear and doubt.

Princeton, NJ



I haven't run a regression on this, but I sort of take it as an article of faith that cynics tend to be more intelligent than idealists. (If cynicism is the last refuge of the idealist, then it's just the more intelligent idealists who see the need to seek refuge.)

Anyway, if you allow me a given that cynics are more intelligent than idealists, then based on your analysis above it follows that dumber people are better for the economy (at least up to a point) than more intelligent people.

I wonder whether we've just explained our education system?

Bill B.

Reagan and Clinton both had unshakable optimism and the ability to communicate it to the public. Obama strikes me as more pensive. I believe his approach will create a modicum of consumer confidence but I don't think he will be the irresistable cheerleader that can make people get excited about spending money right away.


It's an interesting thought, and I think it has merit. I think national leaders do affect the public mood, and I think it's amplified by the media. I also think that people validate what they see and hear on TV and the Internet with their personal experience and that of people they know. For example, I don't think people start cutting back on purchases just because CNN wrings its collective hands about the economy. But if they can't sell their homes, or some of their friends or family lose their jobs, I think they do start to worry, and the media reports have more traction.

Likewise, with upbeat news, the media will amplify the words and actions of our leaders. But we also want to see people selling homes or opening businesses or getting back to work before we start buying that new car or adding a room to the house.

As for the stock market, I think it affects moods more than actions, unless someone has their life savings in stocks. Even then, market movements are beyond the understanding of most of us, so it's not unlike watching someone else bet our money at roulette. I think, though, it's a slow factor rather than a fast one. If my 401K is ravaged, I may not retire this year, or I may chnge future plans. It probably won't affect my current purchases one way or the other.



I thought it was basic tenet of neo-Keynesian macroeconomics that Presidents have little control over the economy. It's all about the federal reserve...

Peter Driscoll

You, Paul Kimmelman and all of your commenters and readers who have not already done so, should immediately acquire and read Unequal Democracy by Larry Bartels (Princeton Univ. Press 2008). Plenty for wonks, lots of metrics, lots of graphs, charts and tables. It seems that what happens during presidencies is not always controllable, but their reactions are, Short summary: Democrats act quickly to lower unemployment and stimulate spending. Republicans act quickly to tamp down inflation. Results: More income and wealth equality during democratic presidencies and slightly less inflation during republican.

Christian R

Hmm... interesting thoughts, but is this really knowable? Do we really have enough data to separate the effect of presidents' actions from all other factors affecting the economy, without putting all kinds of biasing assumptions into the model? I would think not. We're just reading signal into the noise.

Joe Smith

"During the discussion he stated that WW2, and not the ‘new deal’, ended the depression."

It seems to me that one of the aspects of the stimulus effects of WW2 that is ignored is that it had to involve a significant drop in the standard of living of the very middle class that FDR tried to protect and Obama says he will protect. The economic importance of WW2 was partly that it made the middle class willing to accept the fall in standard of living.


@36, I would note that the stock market is still news driven, even if somewhat irrational. Uncertainty causes negative impact on the stock market because the data watchers cannot predict outcomes; then trend followers see the results and jump on the bandwagon - hence we see instability when foreknowledge is the weakest.

@39, it would seem that similar behaviors have been seen all the way back to GW. It is harder to be sure for 3 reasons: we do not have measures of consumer confidence going very far back; consumers had far less visibility to what was going on through much of our history (it was delayed and compressed and summarized); the economic situation tended to be more regional and less national. But, looking at the turn of the 20th century, it does appear that there was a lot of similar effects. Of course, runs on banks happened quite a few times, usually fueled my rumors and fear (some things never change...).

Also, oil shock is not what triggered this; the lack of trust in what GWB says is not because of oil prices as far as I can see. I think it comes from way too many confident statements that just never turned out to be true.


Billy C

When I graduated in the mid-sixties I was already apprehensive about the growth of suburbs, shopping centers and the increasing dependence on cars and roadways to deliver our expanding consumption, land use, waste-lines, landfills etc. etc. President Carter attempted to change our attitudes but was trumped by Presidents Reagan's return to the dreams of the post-war America. The exponential exploitation required by this mega machine, up-down, trickle down, I got mine now go get yours attitude has remained unable to do the math even as it created concentrated wealth on a scale more in line with the rule of kings and queens and the patronage capitalism of their realms than with an egalitarian fueled democracy.

The tired maxim "grow or die" must be replaced by sustainability models, already ignored for much too long by our addicted, don't make me change my habits attitudes. This election provides proof that a majority of citizens are ready to face reality i.e. they can "do the math". It is going to be the worst of times and the best of times for our country and world. But it will be invigorating to get on with it. I wish I was young enough to see how it goes.




Peter Driscoll #42 comes close to perpetuating the Republican myths about their spending habits and wealth distribution.

Reagan, Bush and Bush accumulated more than $7 trillion of the $10 trillion historical sum total of the nation's debt. That means these three presidents did worse debt damage, by more than a factor of two, than all other presidents in the nation's history, combined.

Wealth has concentrated in fewer hands under Republicans to where 1% of the population owned 33% of the wealth in 2003. Anyone who thinks that has reversed since 2003 is hereby cut off at the Kool-Aid stand.

Gervasio Prado

It would be a shame if the current economic crisis does not result is a more permanent change of the American consumer's habits away from pleasure-driven consumption (like Chinese made flat screen TVs, electronic gadgets, fancy imported cars) towards investment-driven consumption (infrastructure repair and development, higher savings rates). Most americans are not aware that they no longer have an advantage in infrastructure and technology relative to the rest of the world. Although we still have a higher 'standard of living' than most countries, it is easy to find areas where we are far behind: better high-speed rail transportation in Europe, more access to broadband internet links in Japan and Korea, etc.

Some of the "economic stimulus" measures taken so far are of dubius value: If you use your tax rebate check to buy a chinese-made flat screen TV, how does that help the US economy (maybe it produces some higher profits for Walmart).


Cambridge, MA


the Gooch

Scott Supak (#4),

I am glad you are smarter than math. Thanks for your enlightening opinion.